MACD Histogram Trading Strategy in 2025 (Rules, Setup, Backtest, Example)
The MACD-histogram trading strategy is a mean-reversion system that identifies momentum changes and reversal points in the stock market. The strategy has generated 6669 trades on a portfolio of 77 ETFs, with long positions better than short positions.
Let’s jump right into it. Let’s test a MACD-histogram trading strategy. Further down in the article, you’ll find a backtest of QLD, which has annual returns of buy-and-hold despite being invested just 5% of the time.
This article looks at the MACD histogram. Please read this article for a primer on this indicator: Does the MACD indicator work?
I’m trading some strategies based on mean reversion on a sample of 77 ETFs, the most liquid ones. One of the strategies I trade is based on the MACD-Histogram.
It’s a popular indicator I have tweaked a little bit. On a per trade basis, this is one of the best strategies I have. I have tweaked this one a little bit to the following:
MACD histogram trading strategy (Trading Rules)
We describe the trading rules both in plain English and by using a chart:
Trading Rules
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Entry is on the close. The exit is on the first day when the close is higher than before. Here is an example (the exit was on the close the day after because the ETF rose in price):
For short it is vice versa. However, long is a lot better than short. In general, short is a lot more difficult to trade.
In total, this strategy has generated 6669 trades on my portfolio of 77 ETFs.
This diagram shows the average gain per trade since 2000. Among those 77 ETFs hardly any is negative:
From month to month we get the following bar chart:
I think this is a pretty good result. Assuming one can only trade a maximum of ten positions at a time as a portfolio, we get this equity curve:
This strategy is in cash most of the time! This strategy can be one of several if swing trading. This proves that a very simple strategy can be very efficient.
MACD Histogram on Nasdaq 100
Let’s test the above strategy on the Nasdaq 100. For this, we use leverage and backtest the ETF with the ticker code QLD, which is 2x Nasdaq 100. The backtest period is from its inception in 2007 until today, more than 18 years of data.
Here’s the equity curve:
There were 85 trades, and the average gain was 2.2%. That equals 10.4% annual returns—not bad for being invested only 5% of the time! The max drawdown was 19%, which is quite good considering the 2x leverage.
Conclusion:
The MACD-histogram trading strategy works well as a mean-reversion system. You can probably improve it by tweaking it.
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Why is the MACD-histogram a popular indicator for traders?
The MACD-histogram is popular among traders because it helps identify changes in momentum and potential reversal points in the market.
What are the entry and exit points for the MACD-histogram strategy?
This strategy’s entry point is the close, and the exit point is on the first day when the close is higher than the previous day’s close.
How does the MACD-histogram strategy perform with long and short positions?
The MACD-histogram strategy is more efficient with long positions, and short positions are generally more challenging to trade.
What is a MACD Histogram?
MACD Histogram is a visual representation of the difference between the MACD line and the signal line. It helps traders identify changes in momentum and potential trend reversals in financial markets.
How do you read a histogram on MACD?
To read a histogram on MACD (Moving Average Convergence Divergence), look at the bars. When bars are above the zero line, it indicates bullish momentum; when below, it indicates bearish momentum. The height of the bars shows the strength of the momentum.
What is the MACD histogram crossover strategy?
The MACD histogram crossover strategy is a trading technique that involves using the MACD histogram to identify potential changes in momentum. It triggers a buy signal when the histogram crosses above the zero line and a sell signal when it crosses below the zero line.